SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 15423 / July 28, 1997
SECURITIES AND EXCHANGE COMMISSION v. FIRST CALIFORNIA CAPITAL MARKETS
GROUP, INC., H. MICHAEL RICHARDSON and DERRICK DUMONT, United States
District Court for the Northern District of California, Civil Action No.
97-2761-SI (N.D. Cal. 1997).
The Securities and Exchange Commission ("Commission") today sued a
securities brokerage and two of its executives for defrauding investors who
bought $69 million worth of municipal bonds in five municipal bond
offerings in California. The Commission's Complaint alleges that
Defendants lied to investors and omitted to tell them important information
in the offering materials for each bond offering about the risks connected
with the bonds.
The Commission filed its lawsuit against First California Capital
Markets Group, Inc. ("First California"), a broker-dealer formerly
headquartered in San Francisco (now located in San Diego), H. Michael
Richardson, a principal of the firm who lives in the Bay Area, and Derrick
Dumont, the former manager of the firm's land-based financing department
who now lives in Calistoga. The Complaint was filed in the United States
District Court for the Northern District of California.
The Complaint alleges that the fraud was committed in connection with
the Defendants' underwriting of municipal bonds issued by the County of
Nevada ("Nevada County"), the City of Ione ("Ione"), the Avenal Public
Financing Authority ("Avenal"), and the Wasco Public Financing Authority
("Wasco"), all located in Central California.
The six-count Complaint asks the court to enjoin permanently the
Defendants from violating the law, order them to return all ill-gotten
gains plus interest, and impose civil penalties.
Nevada County raised $9 million, and Ione in two offerings raised a
total of $14 million, through the sale of "Mello-Roos" municipal bonds.
Such bonds are issued to finance real estate development. The Complaint
alleges that in the Official Statement for the Nevada County offering, the
Defendants overstated the value of the property, misrepresented the
developer's ownership interest in the property and overstated the
developer's experience and financial condition. The Complaint alleges that
in the Official Statement for the Ione offerings, the Defendants
misrepresented that all of the listed improvements could be built with the
offerings proceeds, overstated the value of the property to be developed,
and failed to disclose that the developer had insufficient capital to
complete the development. These misrepresentations and omissions were
important to investors because they made the projects and the bonds seem
less risky than they actually were.
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The Avenal and Wasco offerings, which raised $11 million and $35
million respectively, involved the sale of "Marks-Roos" municipal bonds.
Such bonds are issued to form pools of money to finance a number of local
projects. The Complaint alleges that First California and Richardson lied
to investors or omitted to tell them important information in the Official
Statements for these offerings about the need for the amount of money
raised and the certainty of the intended use of the proceeds. The
Complaint alleges that the Defendants failed to disclose that some of the
projects listed in the Avenal Official Statement and nearly all of the
projects in the Wasco Official Statement were highly contingent, if not
speculative. These misrepresentations were important to investors because
they falsely created the impression that the pools were fully subscribed.
When a bond issue is not fully subscribed, investors could be exposed to
the risk that the bonds would not be able to pay principal and interest.
All of this conduct violated the antifraud provisions of the federal
securities laws, including Section 17(a) of the Securities Act of 1933,
Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act")
and Rule 10b-5 issued thereunder. Defendants also violated Section
15B(c)(1) of the Exchange Act and Rule G-17 of the Municipal Securities
Rulemaking Board ("MSRB"), which require a municipal securities broker to
deal fairly with its customers.
The Complaint further alleges that First California and Richardson,
when underwriting the Nevada County and Ione offerings, advised Wasco and
Avenal to buy large blocks of the Nevada County and Ione bonds, even though
they knew that these bonds did not meet certain requirements for Wasco and
Avenal which investors had been told would be followed. In addition, First
California and Richardson--aware of a representation to Wasco investors
that proceeds not invested within a three-year period would be returned to
bondholders--advised Wasco to purchase several low quality securities (for
one of which First California acted as the underwriter) after the close of
the three-year period. All this conduct violated Section 15B(c)(1) of the
Exchange Act and MSRB Rule G-19, which require municipal securities brokers
to recommend only suitable investments to its clients.
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Finally, the Complaint alleges that in February 1994, when Nevada
County offered to redeem roughly half of its bonds with its remaining
proceeds, First California and Richardson recommended to Wasco and Avenal
that they not tender their bonds. This advice allowed First California's
other clients holding Nevada County bonds to redeem at par while leaving
Wasco and Avenal holding Nevada County's troubled bonds. This conduct
violated Section 15B(c)(1) of the Exchange Act and MSRB Rule G-17.
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